Cashflow

12 June 2020


4 min read

Whilst the unprecedented spread of the coronavirus around the world continues, businesses have been dealing with the disruption to their workforce, supply chains and projected cash flow. As the international scale of the pandemic progresses through the complex ecosystem of the global economy, business leaders are working with their accountants to proactively balance shielding against downside risks with readiness for growth. 

FINANCE AND CASH

Cash has always been king. Cash and headroom are critical as operations and output are impacted while staff and establishment outgoings remain fixed. Businesses can review all assumptions that feed into their cash flow projections, and run scenarios on profit and loss, balance sheet and cash flows with various degrees of interruption of how their businesses may be impacted. In many discussions with clients over the last 3 months, they have mentioned their accountants advising them to collect debtors as quickly possible, be careful offering credit and deploy available inventory on the floor. Sound advice around the cash conversion cycle – or CCC – is the length of time, measured in days, taken for a company to convert the investments and assets in its inventory into cash generated from sales. Some excellent initiatives implemented over recent weeks:

  1. Changing invoicing terms to a mix of cash upfront and remainder 14 days after end of month.
  2. Negotiating new supplier payment terms to help their business.
  3. Major marketing campaigns to support clearance of inventory.

SUPPLY CHAIN

Businesses need to review upstream and downstream to identify where the vulnerabilities are. The impact on supply chains was highlighted from the shut-down in China, but as that disruption expands across the world, some of its impact on businesses is yet to be felt depending on lead times and component stocks. Business should factor in contingencies around their specific supply chain as port and container backlogs are slowly cleared, particularly on seasonal stock.

FORECASTING DEMAND

In Australia, seasonal businesses will be significantly impacted if the disruption period has coincided with lower demand, leaving inefficiencies such as over-capacity or excess stock. It makes perfect commercial sense to review inputs to avoid having fixed commitments and outgoings should turnover be significantly reduced. Mitigating actions that could be pursued include taking more flexible arrangements on purchases should they need to be reduced or returned and considering government support programs available for reduction in staff hours, salaries or headcount.

Businesses must expect that their customers will be looking for this same flexibility of arrangements as they in turn look to mitigate their exposure. Businesses that deal in B2C markets should expect that as consumer sentiment drops, their customers may wish to postpone large financial commitments and purchases, and will be reluctant to commit to events that they are unsure will go ahead. As consumers behave differently during a disruptive period, such as avoiding gatherings or working from home, this should be factored into projected demand.

Those serving B2B markets need to also look through their customer to the ultimate end users to really understand how they are exposed and where they may need support. Businesses need to work through impacts in relation to sales pipeline, stock and receiving payment, whilst maintaining existing customer relationships.

SERVICE DELIVERY MODELS

Critical activities, key customers and core people will be identified through organisational business impact assessment. Alternative service delivery options should be explored, for example home delivery or in-home services and online delivery platforms, and how this could be serviced by redeployment of current staff. Management will need to ensure that they understand the terms and conditions of employee contracts and agree how they wish to engage with their workforce should this arise. Businesses may need to contract and engage additional or alternative staff or suppliers in the event that their regular workforce is unavailable.

Australia has built an enviable response in cushioning the impact of COVD-19, and we can look forward with some optimism. The primary focus of Government to date has been to minimise the costs of the crisis to Australian SMEs, and as we look forward, the Government will shift focus to deregulation, productivity measures and reward expansion/development activities through tax incentives.